The US Federal Reserve (Fed) raised interest rates by 3 yards last week, raising the benchmark interest rate to 3% to 3.25%, the highest since the financial tsunami in 2008, and signaled that it will continue to raise interest rates to curb inflation. Jeremy Siegel, a long-term bull on U.S. stocks and a professor of finance at the Wharton School of Business, criticized that the Fed is making one of the biggest mistakes in its 110-year history that might lead to a deep recession.
Siegel said that the Fed is making one of its biggest mistakes in its 110-year history. It failed to tighten monetary policy last year before inflation got out of control. Now the Fed has made an even bigger mistake by aggressively tightening monetary policy to curb inflation.
Siegel said he is concerned regarding the risk of excessive rate hikes by Fed policy. If Fed Chairman Powell insists on the official data inflation rate falling to 2%, then he will inevitably tighten monetary policy excessively, committing 2021 and early 2022. Same mistake of being too slow in restricting liquidity.
Siegel said that when all commodities are rising rapidly, the Fed and Powell say there is no inflation in sight and see no need to raise interest rates in 2022. Now, when prices for the same commodities and assets are falling, the Fed says stubborn inflation will keep it tight until 2023. Siegel said he might not understand such an approach.
Siegel believes that the Fed’s approach will lead to a painful recession in the United States, and the working class and the middle class will pay the price.
Powell said at the annual meeting of central banks in Jackson Hole that the Fed’s job of reducing inflation has not been successful and will continue to raise interest rates for some time, warning that the U.S. economy will face “some pain” ahead. He also mentioned that historical experience, the Fed is worried regarding prematurely halting interest rate hikes, and the labor market is more likely to be hit more powerfully.
